In his more than 60 years of investing, Warren Buffett has amassed several lifetimes of investing experience and mastered the art of delivering the perfect sharp, quotable quip for any question tossed his way.
The library of Buffettisms may sound crafted solely for sound bites, but don’t be fooled by his economy of words. Listen closely and you’ll find depth, wisdom and practical takeaways whether you’re a new investor, seasoned stock trader or wary bystander.
Here are five from the treasure trove of the Berkshire Hathaway chief’s annual letters to shareholders, interviews and biographies.
1. ‘Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.’
From real-time stock quotes to bull vs. bear analysts duking it out on live TV, there’s a din of investing distractions today that feeds our brains a steady diet of mental junk food. Amid this noise, the big-picture focus recedes and we feel compelled to react to whatever immediate threat looms (a trumped-up clickbait headline, a momentary market disruption).
Letting emotions drive investment decisions is one of the most common investing mistakes. Consider the returns of 401(k) account holders who pulled money out of the market and sat on the sidelines during the financial crisis. From September 2008 to March 2010, they lost an average of nearly 7% in their accounts, according to a Fidelity study of more than 11 million 401(k) accounts.
Investors who rode the downturn, maintained their stock allocation and continued to make regular contributions to their retirement account during the same time frame saw their 401(k) balances increase roughly 22%. Proof, as Buffett says, that the failure to react — or the fortitude, really — is a powerful investing tool.
2. ‘Our favorite holding period is forever.’
Here Buffett isn’t advising people to never sell a stock. His full quote (in a 1988 letter to Berkshire Hathaway shareholders) reveals that he’s talking about picking stable companies that provide investors with peace of mind: “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.”
Buffett’s aim is to become part-owner of great companies that, over time, deliver investors a bigger payoff than a bunch of short-term bets. Commitment isn’t in the cards for the stereotypical active stock trader who’s focused on making a quick buck on near-term share price movements.
How does an individual investor find commitment-worthy businesses? The Oracle of Omaha has advice on that, too: He says to act like you have a lifetime investing decision card with just 20 punches on it. And finding companies that deserve one of those spots? Read on …
3. ‘Buy into a company because you want to own it, not because you want the stock to go up.’
Anyone can buy stocks. Buffett shops for businesses, not ticker symbols. And remember that you’re buying, not borrowing, shares. (Another handy guideline to remember: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”)
Evaluating a company from the perspective of a potential business partner (after all, that’s what investing in stocks really is) is about looking at how well the business is run, whether it has a competitive advantage in its field and if the management team has what it takes to drive long-term growth and manage through short-term setbacks.
So strong is the belief in the companies he buys that when Buffett and his investing co-pilot Charlie Munger have extra dollars to invest, before they look elsewhere they shop the portfolio of companies they already own. Renewing their commitment to familiar businesses keeps things simple in a world where there is an overwhelming number of investment choices.
Finding great companies to invest in is step one. The ability to not only hold on through thick and thin, but to continue to buy when trouble hits — that’s the difference between a good stock picker and a great investor.
4. ‘Be fearful when others are greedy and greedy only when others are fearful.’
You’ve done your research and purchased shares in companies that are in a good position to deliver long-term rewards. Then the inevitable happens. The share price gets slammed. Maybe it’s a victim of collateral damage during an overall market dip, or perhaps the downturn is tied to poor short-term earnings or a company/industry-specific crisis.
This is the moment of truth, or as Buffett put it in his letter to shareholders during the dot-bomb crisis in 2001: “You only find out who is swimming naked when the tide goes out.”
A good part of Buffett’s success is that he not only withstands discomfort, but he also embraces the opportunities that it brings. “The best thing that happens to us is when a great company gets into temporary trouble. … We want to buy them when they’re on the operating table.”
5. ‘In investing, it is not necessary to do extraordinary things to get extraordinary results.’
Buffett makes investing look easy. Deceptively easy. But in reality his success is due to his ability to do extraordinary things: He has mastered his emotions (having the temperament to control natural instincts that lead investors astray), has an insatiable intellectual curiosity (to research stocks inside and out) and maintains an unwavering focus on long-term investment results.
Buffett has had plenty of time to become a master, which is why individual investors should take a more literal interpretation of the quote above. And that is: Don’t get fancy and don’t make investing overly complicated.
Buffett’s go-to advice for the majority of investors is simple: “The trick is not to pick the right company,” he said in a recent CNBC interview. “The trick is to essentially buy all the big companies through the S&P 500.”
He’s talking about investing in index mutual funds. Exciting? Not really. Effective? Absolutely: The Standard & Poor’s 500 (an index of 500 of the largest companies in the U.S.) has posted an average annual return of nearly 10% since 1928.
Fortune favors those who invest consistently and cost-effectively, he went on to explain. Investment fees are the enemy of investment returns. Ordinary index funds are known for their very low management costs, and using a low-cost online broker ensures that more of your savings is working for you. (New to the world of brokers? See NerdWallet’s analysis of the best stock brokers for beginners.)
So strong is Buffett’s conviction about this simple approach to investing that in his 2013 letter to shareholders he revealed that he has provided the same instructions in his will for the trustees in charge of managing money for his heirs: “I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
Dayana Yochim is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @dayanayochim.